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Brexit: what does it mean for Digital VAT in the EU?

Tue Jun 28, 2016

Thursday, June 23, was a seminal moment in the UK’s political history as it’s citizens voted by a margin of 52% to 48% to leave the European Union (EU).

But what does the Brexit vote mean for digital service multinationals already based in the UK, or for ones considering a base there?

The first thing to note is that it is not yet clear what relationship the UK will have with the EU once Brexit has officially come into effect. Any speculation on how the landscape will look when the chips do fall is premature. What is certain is that as of today the UK is part of the EU and as George Osborne, the Chancellor of the Exchequer in the UK, made clear the UK is still a member of the EU today and all its rules and regulations remain in place.

Osborne stated in his morning address that there is no change to the “way our economy and financial system is regulated.”

Given David Cameron’s resignation last Friday morning the next step for the UK is to elect a Prime Minister. Once that election is complete then the focus will turn to Article 50 of the Lisbon Treaty which outlines the steps involved when an EU member states decides to “withdraw from the Union in accordance with its own constitutional requirements.”

What is not certain, but probable, is that it will take some time for the UK and the EU to figure out what Brexit actually means. The mandatory timeline enshrined in Article 50.3 of the Lisbon Treaty is two years. However, it will likely be even longer before Brexit comes into force. This will give some time to digest what changes, if any, will come into effect for taxation of digital sales to UK consumers.

Brexit EU VAT concerns: what do digital service providers need to do?

As of today, and for some considerable time, there is nothing new that a digital service provider with UK consumers needs to do. All the obligations regarding the sale of digital goods to UK consumers is already well established in EU law. This was the law before the referendum, is the law today, and will remain the law until it changes at some point in the future.

Is Brexit likely to mean I won’t have to charge tax on digital sales in the UK in the future?

It is not certain. What is clear is that the UK will still need money to fund the state and they will probably look to raise this money through taxes. Sales from foreign digital retailers are unlikely to become tax free. Why would the UK choose to forego this increasingly significant source of tax revenue? This means that while the method of filing or settlement may change in the future, the actual charging of VAT is unlikely to change.

What if my business is not from the EU and I have my MOSS place of registration in the UK?

Again, as of today nothing has changed, so no changes are required of you now. We in Taxamo will keep close watch on any discussion within the UK and Brussels regarding any changes to the UK’s role in MOSS.

What we would suggest is that if you are looking for an EU country in which to register and you have not yet registered, then consider registering with the Irish revenue rather than with the UK’s tax authority: HMRC.

So, what will Brexit mean for UK companies that provide digital services to EU consumers?

There is one significant potential VAT change for UK digital service providers following the Brexit vote. As the UK will no longer be part of the EU the thousands of UK-based companies that trade with the EU will lose their intra-community trading status.

Their status post-Brexit will depend on trade agreements negotiated by a future UK government. The UK could seek a similar arrangement as to one similar to Norway’s by being part of the European Economic Area (EEA) and negotiating on that basis. Alternatively, the UK could negotiate a series of bilateral trade deals mirroring Switzerland’s approach, or they could negotiate as a member of the World Trade Organization (WTO).

One possibility is that instead of business-to-business (B2B) sales to EU companies being 0% VAT rated as is the case today, these sales will be treated as imports into the EU, and as a result be subject to EU VAT.

What does this mean for the Taxamo service?

If, as is now likely, the UK withdraws from the EU Taxamo will support any new UK arrangement.

This is the advantage of partnering with Taxamo. We analyse what changes, if any, are required and we ensure that our digital tax solution – that you have integrated with – is current and allows you to seamlessly comply with your tax obligations.

In the fast moving world of international tax compliance, it is important that you consider a partner who has a global focus and can manage current and future tax landscapes.

Options for non-Union businesses

Non-Union businesses need to consider registering in Ireland rather than UK if they have not already registered.

In January of 2015 the EU introduced a new piece of legislation covering the supply of digital services to consumers across the EU. As part of this new law a system that has become known as VAT MOSS (mini one-stop shop) was created.

The UK’s decision to exit the EU does not impact on a company’s compliance with this EU VAT legislation. While the UK will no longer be part of the EU, and will not adhere to EU VAT Directive requirements, companies based there can still use the VAT MOSS simplified compliance system as a non-Union business.

The simplicity of the MOSS system is that a non-Union business can select one EU member state as their reporting base for compliance with EU VAT rules. The UK’s decision to leave removes them as an option.

As a result unregistered non-Union businesses – for example, U.S.-based digital service companies – will need another option after the UK leaves the EU. These companies will no longer be able to use the UK as their base. The next best option is for these companies to consider registering in Ireland, as it will become the only native English language tax jurisdiction remaining in the EU.